Argentina Central Bank Bans Imports Due to Lack of Dollars; Argentina to Apply “Iron Fist” to Those Who Raise Prices

As reserves run dry, demand for dollars soars in emerging market countries, prompting inane economic actions. 

Via google translation from Libre Mercardo, please consider Argentina Cerntral Bank Bans Imports Due to Lack of Dollars. 

 The fourth day of falling reserves has the Argentine central reeling. This Wednesday reserves fell by 180 million and this month reserves declined by $2 billion. Due to demand and the low level of foreign exchange reserves, the central bank has stopped payment of imports, according to Argentine newspaper La Nacion.

“Almost all the customers who went to the bank did so to hoard dollars,” claimed the cashier of a national bank to the southern newspaper.

“Today almost no imports were approved import” confided the head of the table of a major bank in the nation.

Argentina to Apply “Iron Fist” to Those Who Raise Prices

Via translation from El Economista, please consider Argentina Threatens to “Get Tough” on Businesses that Raise Prices. 

 Economic war has moved to Argentina. The Argentine government said it will apply an “iron fist” against the shops and businesses that raise prices following the sharp devaluation of the local currency last week, hoping to avoid tripping high inflation in the country.

Argentina has one of the highest inflation rates in the world, which in 2013 was around 25% according to private estimates.

Prices of products with imported components such as appliances and vehicles rose immediately after the devaluation. Moody’s expects a devaluation of the Argentine peso 50% in 2014.

Before the devaluation, the Government launched a plan to fix maximum prices on about a hundred products sold in supermarkets. But the incentive is limited and includes products that are hard to find on the shelves.

Simple Rules

Fix prices too low and there will be no supply. Stores will not sell at a loss. Set prices too high and sellers will come out of the woodwork.

For an example of the latter, please see China Abandons Disastrous Cotton Stockpiling Program; Lessons Not Learned; What About Stockpiling Money?

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Related: Barcelona to Fine Owners of Empty Homes 100,000 Euros
Read more at http://globaleconomicanalysis.blogspot.com/#f6QvEIWVhlOEWKQ0.99

In terms of asset purchases monetary policy was, is and will be accommodative. More importantly so is the case with interest rates, which are still flirting with zero percent range – despite the fact that that lowering was believed by some to be temporary. I remember that even in 2009 there were people seriously arguing that we should expect interest rate hikes in few months. The history has proven them to be astonishingly wrong.

The continuous message from the Fed is that even with asset adjustments the rates are supposed to stay low until official inflation becomes a danger, or unemployment is finally significantly lower. That is all fine, we understand the signal, but we are also curious as to when the Fed officials consider this to have happened? When do they expect either much lower unemployment, or endangering inflation rate – the point at which the interest rates are raised again? Interestingly we received some additional information on this at the end of year 2013.

In general Fed officials are seeing interest rate hikes on the horizon, but not in the near horizon. Here is the graph depicting interest rate levels in 2014 according to FOMC members:

First things first: The Federal Reserve did exactly what I predicted, before it was fashionable to predict it. They agreed to lop another $10 billion off the QE bond-buying program at this week’s meeting, slashing it to $65 billion.

Policymakers also strongly implied they will continue to reduce their bond buying going forward. That step, in turn, sets the stage for actual short-term interest rate hikes. I continue to believe those will begin earlier than most market players believe, and I would start preparing for them.

But what the Fed did this week is nothing compared to what happened elsewhere in the interest rate markets.

Just imagine that you woke up one morning and the Fed had jacked interest rates up by 425 basis points overnight. That’s 4.25 percentage points — enough to raise the federal funds rate from its current 0 percent to 0.25 percent range to around 4.5 percent.

If you’re not already aware, the overnight rate serves as a benchmark for the prime rate. And the prime rate is the benchmark that many variable rate loans are tied to. So if you had a variable rate credit card at the Bankrate.com national average rate of about 11 percent, it would almost immediately surge to 15.25 percent.

Assuming you had a $10,000 balance on your credit card at 11 percent, it would take 11 years and two months to pay off, assuming a $400 monthly payment along the way. You’d pay around $2,914 in interest over that time. At a rate of 15.25 percent, it’d take you one year and three months longer to pay that balance off, and it would cost you $4,561 in interest. That’s more than $1,600 in extra interest costs.

Your home equity line of credit? Its rate would surge from around 4.8 percent to just over 9 percent.

Any variable rate business loans you might have outstanding? Up, up, up!

With longer-term mortgages, there’s no telling exactly how much rates would go up because they don’t move on a 1-to-1 basis with overnight rates. But it’s a safe bet that they would rise at least 100 to 200 basis points.

That would drive the monthly payment on a $300,000 mortgage from around $1,490 (at a recent average rate of 4.33 percent) to a whopping $1,863. That’s more than $370 more a month … every month … for the next three decades.

Why am I bringing all this up?

Because the Turkish central bank was just forced to hike its overnight rate to 12 percent from 7.75 percent. It also had to more than double a separate overnight borrowing rate to 8 percent from 3.5 percent. So you can only imagine how the local economy there is going to react.

More importantly for a U.S.-based investor is the reason behind the move, and what it signifies for the year ahead. Turkey’s currency is the lira, and it has been falling sharply for weeks because of political turmoil and concern over the nation’s ability to finance its current account deficit.

Emerging market nations with yawning deficits need constant inflows of foreign capital to finance them. So if anything spooks foreign investors and causes them to pull back, things get real ugly, real fast. The currency plunges, the markets tank, and the central bank is often forced to implement capital controls or jack up interest rates to a level high enough to stem the outflows.

The problem is that those hikes can also drive a stake through the heart of the domestic economy. After all, if you woke up and the required monthly payment on a home mortgage had just soared by almost $400 overnight, what would you do? Chances are you’d shelve your home buying plans in a heartbeat!

Turkey is far from alone. Investors have been focusing like a laser on a “Fragile Five” bloc of nations — Turkey, Brazil, India, South Africa and Indonesia — that are in a similar bind. Their currencies and stock markets have all come under pressure amid capital concerns, and their central banks have generally been responding by raising interest rates for the past several months.

In fact, the central bank in South Africa raised rates by 50 basis points mere hours after Turkey hiked its benchmark rate. The increase pushed the rate to 5.5 percent from 5 percent, and it was the first hike going all the way back to June 2008.

What started the ball rolling? Why have emerging markets been under so much pressure?

It all goes back to the Fed. The ongoing rollback of QE — and the interest rate hikes in the U.S. and other developed nations that are likely to follow — are causing investors to rethink their emerging market exposure.

You see, one key reason so much money flowed out of the U.S., U.K. and the euro zone and in to emerging markets is because yields were artificially suppressed for so long in developed economies. Investors were forced to “chase yield” wherever they could get it, and the available yields in emerging markets were just too juicy to pass up.

Now that we’re starting to see developed world central banks lay the groundwork for draining that liquidity again, the emerging market world is facing the consequences. This is one reason I’ve been avoiding virtually all emerging market investments for a long time now, and focusing on more domestically oriented recommendations. As capital drains from emerging market investments, and makes its way back to developed markets, those kinds of names should do relatively well.

Just like with interest rates, you ultimately hit a “tipping point” with these kinds of emerging market crises. Things get bad enough, and go on for long enough, to lead to widespread selling in almost all assets, even those that have absolutely nothing to do with any of the “Fragile Five.”

I don’t think we’re at that stage yet, in large part because the domestic economy is in better shape than it has been for the past few years. But you can rest assured I’ll be watching to see if anything changes — and will do my best to let you know what all these new developments mean for your investments.

Until next time,

Mike

The investment strategy and opinions expressed in this article are those of the author’s and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.

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Despite the volatility and declines in Emerging Market equities and currencies over the last couple of weeks, a few of the financial bubbles outside of the developed world continue to persist.

As of this morning, Rwandan 10-year government bonds are still only yielding 7.25%.

Perhaps this is because Rwanda is considered a “Frontier” Market (a notch or two below your typical Emerging Market) and this sector has not gotten attention yet.  Or, maybe it was missed because the $400 million USD size of the bond issue is too small to get noticed on the trading desks in New York and London.

However, one thing that this certainly indicates is how casually investors are continuing to invest in something for a minor pickup in yield.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. 

Richardson GMP Limited, Member Canadian Investor Protection Fund.

Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.